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Here is What Hedge Funds Think About Southwest Airlines Co. (LUV)

Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let's see whether Southwest Airlines Co. (NYSE:LUV) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

Is Southwest Airlines Co. (NYSE:LUV) a buy here? The best stock pickers are betting on the stock. The number of bullish hedge fund bets moved up by 4 recently. Our calculations also showed that LUV isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). LUV was in 44 hedge funds' portfolios at the end of December. There were 40 hedge funds in our database with LUV positions at the end of the previous quarter.

If you'd ask most investors, hedge funds are perceived as worthless, old financial vehicles of the past. While there are over 8000 funds with their doors open at the moment, Our experts hone in on the crème de la crème of this group, around 850 funds. It is estimated that this group of investors manage the lion's share of the smart money's total asset base, and by watching their first-class investments, Insider Monkey has come up with many investment strategies that have historically surpassed the S&P 500 index. Insider Monkey's flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind we're going to take a look at the recent hedge fund action surrounding Southwest Airlines Co. (NYSE:LUV).

Hedge fund activity in Southwest Airlines Co. (NYSE:LUV)

Heading into the first quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from the third quarter of 2019. On the other hand, there were a total of 40 hedge funds with a bullish position in LUV a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Berkshire Hathaway was the largest shareholder of Southwest Airlines Co. (NYSE:LUV), with a stake worth $2896 million reported as of the end of September. Trailing Berkshire Hathaway was Renaissance Technologies, which amassed a stake valued at $185.6 million. AQR Capital Management, D E Shaw, and Holocene Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Bristol Gate Capital Partners allocated the biggest weight to Southwest Airlines Co. (NYSE:LUV), around 4.09% of its 13F portfolio. Water Street Capital is also relatively very bullish on the stock, designating 3.3 percent of its 13F equity portfolio to LUV.

As aggregate interest increased, specific money managers were leading the bulls' herd. Balyasny Asset Management, managed by Dmitry Balyasny, established the largest position in Southwest Airlines Co. (NYSE:LUV). Balyasny Asset Management had $9.3 million invested in the company at the end of the quarter. Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management also initiated a $5.5 million position during the quarter. The other funds with new positions in the stock are Matthew Tewksbury's Stevens Capital Management, Paul Tudor Jones's Tudor Investment Corp, and Schonfeld Strategic Advisors.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Southwest Airlines Co. (NYSE:LUV) but similarly valued. These stocks are Royal Caribbean Cruises Ltd. (NYSE:RCL), Cintas Corporation (NASDAQ:CTAS), Alcon Inc. (NYSE:ALC), and Motorola Solutions Inc (NYSE:MSI). This group of stocks' market caps are closest to LUV's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RCL,43,1386244,-6 CTAS,45,820938,4 ALC,24,705505,0 MSI,41,560978,4 Average,38.25,868416,0.5 [/table]

As you can see these stocks had an average of 38.25 hedge funds with bullish positions and the average amount invested in these stocks was $868 million. That figure was $3650 million in LUV's case. Cintas Corporation (NASDAQ:CTAS) is the most popular stock in this table. On the other hand Alcon Inc. (NYSE:ALC) is the least popular one with only 24 bullish hedge fund positions. Southwest Airlines Co. (NYSE:LUV) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately LUV wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LUV were disappointed as the stock returned -26.7% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.